|Office of the Chancellor / Public Affairs||
Monday, June 28, 2004
San Francisco Chronicle 6-28-04
How Vallejo school district got itself $60 million in red
Vallejo school district officials grossly overestimated enrollment figures, underestimated salary expenses and approved union contracts they couldn't afford, driving the district into a fiscal collapse that required the governor last week to sign a $60 million bailout, the second largest in state history.
As Vallejo City Unified School District starts digging itself out of the hole, state and local education officials are examining what the district did wrong, so the lessons might prevent other districts experiencing financial troubles from following the same path.
Gov. Arnold Schwarzenegger approved a bill last week that provides more oversight of districts' finances before they run into trouble and provides earlier warning when districts are in distress. And state Superintendent of Public Instruction Jack O'Connell said he favors teaching school boards and districts how to hire superintendents and chief financial officers with strong fiscal sense.
Still, state and local education officials and academics say more needs to be done to prevent other districts from collapsing.
Vallejo City Unified shares several traits with many of the six other school districts the state has taken over since 1991: it is an urban district with a large number of low-income students and pupils for whom English is a second language.
Education experts also note that falling levels of state funding have contributed to those districts' fiscal crises, as have expensive collective bargaining agreements.
"We don't have any early warning system in Sacramento that says 'The complexion and the learning needs of kids are rapidly changing in places like Vallejo' and that may cost money," said Bruce Fuller, a UC Berkeley professor of education and public policy and co-director of Policy Analysis for California Education.
"The other lesson for Sacramento and the districts is 'Don't give away the store' in terms of wage increases and benefit increases and pray they can be paid for five years later," he said.
As a state administrator, Richard Damelio, takes control of the district, state Controller Steve Westly is auditing the district's finances, as required by law after a takeover. The Florida firm MGT of America, at the request of the Solano County Office of Education, is conducting a fraud audit of the district -- just as it did at the Oakland Unified School District when it received a record $100 million bailout last year.
Vallejo had been financially troubled for years when, in 2001, the school board named Gladys Phillips-Evans superintendent. She hired Frank Remkiewicz to manage the district's finances as chief business officer.
Remkiewicz had just left the Hayward Unified School District, where he was assistant superintendent of business services, and Vallejo school board trustee Rozzana Verder-Aliga said she questioned Phillips-Evans decision to hire Remkiewicz because she had reservations about his qualifications.
Under Remkiewicz and Phillips-Evans, the district developed a plan to erase a $1.3 million deficit that occurred after nearly a decade of mounting fiscal troubles. But two years later, in June 2003, business consultant Sarah Hart was hired to review the finances of another Solano County school district, Benicia Unified, and found irregularities in Vallejo's books.
For one thing, "they were a declining enrollment district and they showed a lot of enrollment growth," said Hart, who agreed to serve as the County Office of Education's interim assistant superintendent to help untangle the financial mess.
In the summary of the 2003-04 budget, for instance, district officials told the school board Vallejo would grow by 200 to 250 students during the coming academic year, but the line-item budget listed growth at 1,757 students. Because state funding is tied to enrollment, it appeared as if this new growth would bring the district an additional $8 million in revenue. But enrollment actually declined, as it had in the previous three years, by 350 to 500 students, a loss of at least $1.6 million.
Hart found other problems, so Remkiewicz revised the budget -- compensating for the inflated enrollment by underestimating the expenses for teachers' salaries, Hart said. A cursory glance made it appear the district had cut the salary rolls by $7 million, but corresponding categories like unemployment insurance and workers' compensation did not decline.Other problems included:
-- The district budgeted $327,000 in money owed by the state for mandated costs such as paying employees for their time in collective bargaining talks. But the state, mired in its own fiscal crisis, hadn't been paying up, so Vallejo never saw the money. The year before, for example, California gave Vallejo just $191 out of a budgeted $800,000 in mandated costs, so there was no way the district would receive the $327,000 it was owed, Hart said.
"We told them they could not budget like that," she said.
-- Remkiewicz also simply reversed a $1 million adjustment to workers compensation by the district's auditors to get Vallejo out of a $500,000 hole, Hart said.
As county education officials argued with the district over the budget, school board members say they were kept largely in the dark. Remkiewicz, hired to lift the district out of the red, assured them that all was fine, said board president Verder-Aliga.
County education officials sent the board, through the district office, a letter Oct. 8 detailing the fiscal problems and announcing that the county had hired School Services of California as a fiscal adviser. But Superintendent Phillips-Evans ordered her staff not to forward the letter to the board, said district Deputy Superintendent Cliff Solari, who is retiring.
In the end, the board didn't learn how truly dire the situation was until December.
"The whole board was in shock," Verder-Aliga said. "It was unbelievable."
Efforts to reach Remkiewicz and Phillips-Evans were unsuccessful. Remkiewicz resigned in January and Phillips-Evans was suspended with pay in March. Vallejo faces a $40 million deficit next year if it doesn't make immediate changes.
Other factors compounded Vallejo's problems.
This year, the state cut for the first time the base amount it pays each district per student by 1.2 percent. And Vallejo, like Oakland, is struggling with declining enrollment, which means it's getting less money from the state.
"You get into this depressing spiral ... because as you lose kids, then Sacramento sends you even less money the next year," said Fuller, the UC Berkeley education expert.
Four Bay Area districts have received bailouts since 1991 -- Vallejo, Oakland, Emeryville and Richmond, which is now called West Contra Costa Unified. Three others -- Hayward, Berkeley Unified and Livermore Valley Joint Unified -- are high on a state watch of 45 districts that may not, or cannot, meet their financial obligations.
Many of those districts have student bodies with large numbers of low- income students, or students for whom English is a second language and therefore require additional, and often expensive, instruction.
"If we fund them on a per pupil allocation, it assumes ... it's just as easy to educate a Spanish-speaking kid in Vallejo as it is to educate a wealthy kid from Orinda," Fuller said.
Experts also say many districts in financial distress are bound by exorbitant labor contracts.
The Vallejo school board approved a contract last year that may provide a 3 percent pay increase in July. Oakland was hurt by a 24 percent boost in teacher salaries. The West Contra Costa Unified School District, which has cut deeply to close a $16.5 million deficit, pays lifetime health benefits for its retirees.
The bailout reform bill signed by the governor will give county offices of education 10 days instead of six to review collective bargaining agreements.
"The employees' bargaining units in the Bay Area are much more aggressive than you find in other parts of the state," said Ken Hall, chairman of the board of School Services of California in Sacramento, which has been working with Vallejo.
But others say the problem isn't state funding or students with special needs, but school boards that lack the courage to make tough spending decisions.
"To me what you have is school boards that have been unwilling to make the cut and face down their constituents," said Stanford University Professor Michael Kirst, co-director of Policy Analysis for California Education. "They can say 'We didn't make the cuts, the state did.' "
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